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A quick announcement ahead of theepisode, I will be co-hosting a multi-day event with David Cendra inSeptember.
It's going to be a business breakdowns and founderscollaboration.
And if there's one thing that you learn from studying thesebusinesses, from studyingfounders, just existing in the businesscommunity, it's that relationships run theworld.
And this is going to be an event tailored for the investmentcommunity.
We're going to review each application to ensure it's the highest qualityaudience.
It's limited insize, so you do want to make sure that if you'reinterested, you reserve your spottoday.
And the event is structured to fosterrelationships.
It's going to be on a privatelocation.
The only people on site will be attendees of theconference.
There will be limited main stagetalks, and instead we're going to have a lot of smallerbreakouts,panels, and significant time for one-on-oneconversations.
All of the details can be found in the shownotes, where there will be alink, where you can go directly to join Colossus.com slashevents.
And I'll leave you withthis.
I attended David's event in March of thisyear,2024.
And justyesterday, I was looking at myphone, considering this upcomingconference.
And I noticed there were four different people that I spoke to yesterday that I had met for the first time at David'sconference.
And sincethen, we've continued totalk, continued to fosterrelationships, and who knows where these relationships might go overtime.
When you gather these groups of people in the right type ofenvironment, that's where relationshipscome, and very interesting thingsarise.
So please make sure to check out the link in the shownotes, oragain, join Colossus.com slash events for moreinformation.
This is BusinessBreakdowns.
Business Breakdowns is a series of conversations with investors and operators diving deep into a singlebusiness.
For eachbusiness, we explore itshistory, its businessmodel, its competitiveadvantages, and what makes ittick.
We believe every business has lessons and secrets that investors and operators can learnfrom.
And we are here to bring them toyou.
To find more episodes ofBreakdowns, check out joinColossus.com.
All opinions expressed by hosts and podcast guests are solely their ownopinions.
Hosts, podcastguests, theiremployers, oraffiliates, main-antane positions in the securities discussed in thispodcast.
This podcast is for informational purposesonly, and should not be relied upon as a basis for investmentdecisions.
Welcome back to BusinessBreakdowns.
Today, we are covering mineralresources.
Even if you've had some bad experiences investingcommodities, I would not skip over this one soquickly.
FrazierChristie, investor at TDM GrowthPartners.
Join me to talk about how MinRes has taken a different approach to the historically cyclical boom bustindustry.
We walk through the increasingly vertical integration of mineral resourcesbusiness.
We discuss what powers it in the unique infrastructure services crown jewelasset.
And we get into some of the thoughtful capital allocation that has taken place for thishistory.
It's a very fun business with a very fun founder who still remains a keyplayer, a key operator in thespace.
Please enjoy this breakdown of mineralresources.
Frazier, I am excited to have youhere.
We're going abroad again on business breakdowns to your localland.
And covering mineralresources.
This is a business that I knew nothingabout.
There's something to be learned just from the name ofit.
But I'm hoping you can give us just a 90-second introduction to who mineral resources is and what theydo.
Yeah,sure.Thanks,Matt.
Really appreciate your time on the huge fan of theshow.
So I'm really excited to behere.
I'm also a huge fan of your episodes of lesser knownbusinesses.
I know nothingabout. And so we thought we'd come on the show and share one of our absolute favorites down here fromAustralia.
So mineral resources is a founder led diversified infrastructure and miningbusiness.
Now, before I scare off your listeners by using the wordmining, there are two things I wouldshare.
The first is mineral resources has been one of the best performing stocks of any business listed anywhere over the last 18years.
SinceIPO, it's been able to deliver a total shareholder return of28% per yearcompounded.
The second thing I would add is that ChrisEllison, the founder and still CEOtoday, is adamant on earnings calls that they are just gettingstarted.
And while they may have a $12 billion market captoday, they can grow tomany, many multiples of their currentsize.
In terms of specifically what the businessdoes, I think it's best if we divide the business into twosegments.
This is slightly different to how they reportit, but I think best for thisconversation.
The first segment is the infrastructurebusiness.
We can refer to it asinfricot.
And infricot is the heartbeat of mineralresources.
This is where the business wasfounded.
Infricotbuilds, owns and operates infrastructure for the mining part of thebusiness, but also for third-party major miners like BHP and RioTinto.
The infricot business is charging a fixed fee onvolumes, and so is not in any way exposed to commodityprices.
It's very long-life high-value earnings with high 90s grossretention.
I would argue it is as good if not better than the enterprise software business investors coveredtoday.
The second part of the business is the miningbusiness.
We refer to this as miningcope.
This is probably the higher profile part of mineralresource, but its core purpose is to own stakes between 15 or100% in a range of mining assets that are then operated byinfricot.
It currently operates inlithium, iron ore and naturalgas.
I like that you're coming out hot in terms of the quality of thatinfricot.
I appreciate that in terms of giving us a sense of the crown jewel here of thisbusiness.
I want to touch on ChrisEllison, the founderfirst.
You mentioned it's still owned and operated byChris.
I did do some digging just in terms of hisbackground, and he has quite an entrepreneurialstory.
Can you share just a bit about how you would categorize him as part of thisbusiness, his ownjourney, and how his DNA is basically injected into what Minrezdoes?
Absolutely. Chris and Minrez are kind of one in thesame, and he permeates the culture of thebusiness.
For any of your listeners that are bored with listening to regular earnings calls with corporateexecutives, I would strongly encourage them to go listen to any of the historical earnings calls withChris.
He is a true entrepreneur atheart, and is extremely passionate about hisbusiness.
Chris grew up in NewZealand, and dropped out of high school at 15 to go work on afarm.
His dream was to one day own a farm that he workedon, but he knew he couldn't make enough money in just working on a farm in New Zealand to achieve thisdream.
He heard over in Australia you could make good money andmining.
Wasn't even 20yet. Him and a mate jumped on a plane over to Sydney and road tripped up and down the East Coast trying to findwork.
Obviously they had noqualifications, but he eventually ended up as a craneoperator, and many years later founded Minrez sources in 1992 with $10,000 in a bank account and a $50,000 under-on-creditcard.
From those very humblebeginnings, Chris has transformed Minrez sources into the $12 billion market cap business it istoday, and he still owns about12% of thecompany.
I would say there's been a very long journey of the business and its quality over thattime.
So initially Chris would convince miners to let him crush and process waste iron or essentially on their mines in very smalltonnages, so1, 2 million tons of iron or at atime.
Today, Minrez sources processes hundreds of millions of tons of the best rock for some of the biggest miners in the world and has these very long-term contracts inplace.
So a stat is that over75% of their contracts will be over five years in length within the next couple of years and those contracts typically renew at95% plus retentionrates.
So Chris is this incredible founder that has taken avery, very small humble start and transformed it into one of Australia's biggestbusinesses.
Yeah, it was clear in the research that Idid, he had this entrepreneurial spirit that got him in the door in ways that you would neverexpect, literally barging his way into the back door and that seems to have continuedon.
And then this risk-taking DNA in the sense that he was willing to go out in the zone and find a way and figure itout, getting into what he has built from a businesssense, can you give some sense of the marketoverview?
I think for theUS, we're far away from some of the mining operations or what's goingon.
And mining here is a lot different than what's going on with mining inAustralia.
So to the extent that you can cover what is happening with the miningoperations, any type of market overview and how that plays into their business would be a useful way to paint thepicture.
I'll sort of maybe dive into both parts of the business because there's a very symbiotic relationship between thetwo.
But mining co will deliver about $2 billion in annual EBITDA within the next few years and it covers mining assets acrosslithium, iron orenergy.
And it's all based in WesternAustralia.
In terms of the lithiumbusiness, Minrez operates three of the largest and low-cost lithium hard rock mines in theworld.
All of the output is essentially sent up to China into the battery supply chain and those assets are owned some in partnership with other major miners such as Albumile andGangthing.
In terms of the iron orebusiness, this has historically been a verysmall, high-cost mining business thatrepresents, callit,2% of Australia's iron oreoutput.
But the iron ore assets within Minrez are undergoing a large transformation to now become a verylarge, low-cost mine and we can talk a little bit more about that transformationlater.
Minrez also has this fledgling energy business and are one of the largest onshore oil and gas acreage holders in WesternAustralia.
And they're in the process of getting the government approvals in place to build a sizable natural gasbusiness.
In terms of the infoside, the info business will deliver about a billion dollars annually but are within the next few years and it covers all of the large scale infrastructure that you would need on a mine site and to get or to port and export it into globalmarkets.
So think things likeports,airports, roads and crushing and handlinginfrastructure.
The key of InfraCo might actually surprise yourlisteners.
InfraCo has a construction capability so all the infrastructure is designed and builtin-house.
The construction business doesn't generate any revenue directly but it accounts for over a third of Minrezemployees.
Because there's no one off revenue in thebusiness, the construction capability is only to build this infrastructure on mining co-sites and on third party sites that they can then charge recurring fees on overmany, manyyears.
And this internalcapability, this construction capability allows Minrez to deliver projects at half the time and a third of the capital intensity versus peers that need to outsource design and construction to thirdparties.
So you can kind of see that the idea of mining co-sites is to go on stakes in mines that it can then pass these construction projects over to InfraCo to then build infrastructure that they can clip the ticket on all the volumes overmany, many years goingforward.
So itwould, it pains a really helpful picture in terms of how they would work with a single site and potentially get all of the business unitsinvolved.
Just to put a bow on the commoditiesthemselves, lipping them iron ore naturalgas.
Again, coming from theUS, oftentimes I think of commodities as having these very cyclicaltendencies, you're mentioning that there's long duration and there's no one off revenuepayments, which is going to look very different than the oil or natural gas sector would look here with some of the servicesprovided.
Can you just get into a little bit more about how much cyclicality there actually is in those industries and how they're able to presumably not see that cyclicality and the actual financialresult.
To be clear on the InfraCosite, there's no cyclicality in theearnings.
It's all fixed dollars onvolume.
So that is the pace that is very high quality and typically trades at very high infrastructure likemultiples.
The mining co-site is absolutely exposed to commodityprices.
And so how we think about these commodity businesses is for each individual commodity there is a cost curve and it's important to understand where you sit on that costcurve.
And so for all three of mining co's core asset classes of lithium iron ore andenergy, they are in the lower end of the costcurve, which meansyes, the overall commodity price willfluctuate, but it would have to be at record lows and wiping out significant parts of other mining businesses supply or production for it to materially impact the ongoing operations of miningco.
If I maybe dive a littledeeper, you've got something likelithium, which is obviously exposed to the rapid growth in batteryconsumption, particularly for electric vehicles and hard rock lithium mining as a category is on the very low cost and relative to the other ways you can mine and producelithium.
On the iron oreside, iron ore is part of the steel making process so you need iron ore to makesteel.
Australia is by far and away the lucky country when it comes to the fact that we produce a lot of the iron ore that is sent on to global sea wallmarkets.
And so Australian iron ore miners and now minres are the lowest cost in the world in part helps by our proximity geographically toChina.
And then on the natural gas side Australia is well known of being one of the largest gas exporters in the world due to our low cost gassupplies.
So I think we're kind of up there with the US and Qatar in terms of the quality of ourresources.
So you can see that while yes earnings can be volatile in a commodity'sbusiness, if you are on the low cost end of the costcurve, they're typically very high through the cycle return on invested capital businesses and we can dive intothis.
But one of our key lessons as non commoditiesinvestors, we typically are more kind of software growth investors is that through the cycle return on capital is very important to focus on not just predictability ofearnings.
In terms of what these projects looklike, particularly from the commodity side of theequation, whether it's a miningsite, however you would categorize that side of thebusiness.
How do those look from a life cyclestandpoint, just general economics and how you would think on a project by projectbasis, how minres approachesthis.
It's probably worth doing a little case study on the current iron ore project that's ramping up and is the big high profile part of the businesscurrently.
I would firstly say that minres is very agnostic to mineraltypes, so they essentially are constantly running a beauty parade as to what projects should get up next and it's all about returning invested capital and secondarily what type of earning stream can pass over to theinfo.
So if we look at this new iron oreproject, which is the on's low iron ore project or referto, if we just break apart the mining co burning stream and the info and stream mining cove for on's low will require about 800 million dollars of capital investment of capex and at an iron ore price lower than what it is currently today at spot rates will deliver about a billion dollars or they woulddo.
So that'sannually, so that's over a100% return on invested capital because one is it's a very low cost source of iron ore and the second thing is that capex number is very low because minres has this internal construction capability that I mentioned so it's not having to outsource to a PC contractors it's built iron ore minesbefore.
And so it can deliver these projects again half the time at third of the cost of acompetitor, which means they can take on these projects that have otherwise been considered very hard to do for other minors and turn them into very profitableprojects.
Just on the timeline for that in terms of breaking ground when you see these mining projects there truly magnificent in terms of the size of what they're doing what does that look like in terms of timeline from breaking the ground spending that 800 million capex to hitting that billion dollars of annual EBITDA for a normal project it would normally be let's call it 4 to 7 years at best once constructionstarts.
Minres had all of their approvals done less than a year ago they've already delivered first or are expected to ramp to name plate capacity by this time next year so let's call it two years from shovel hitting it to name platecapacity.
That run rate EBITDA I know some of these have very long life cycles is there a general ballpark for how long these will produce that level of let's call it billion dollars ofEBITDA.
Chris would talk about this on all mine lasting 50 plus years and having billions of tons of reserves sitting in the region if we look to a sort of analogous mining businesses in the area of the area 10 to their own all businesses havebeen.
Huge cash generative for decades and will continue to be for decades so these types of mines it's all about scale economies going into these regions with huge deposits most miners would have to spend tens of billions of dollars in capex in rail and port and all the mining infrastructure and that gives you these very long lifeearnings.
So we talked about the mining co returns for the onslaught project with we talk about info if we think about the capital investment required it's about $1.7 billion of capex to result in about $560 million of EBITDA which is about a 30 plus Royce which is obviously still extremely attractive for an infrastructure asset however and this is the magic of Chris Ellison as a capital allocator he recently sold $140 million of the $560 million of EBITDA for post tax proceeds of about $1.2billion.
So now all of a sudden the economics are you've only got $500 million of net capex to translate into $420 million of EBITDA and so now all of a sudden you've got a plus80% return on invested capital on an infrastructure asset that has multi decade life and is just clipping the ticket on volumes beingprocessed.
So you can sort us now see the magic of the projects that Chris goes after and they would say it's not about any one project making this business is being able to do this consistently over a very long period of time so even if we pick on some otherprojects.
Chris bought a lithium mine out of administration and receivership late last year he's been very cagey about exactly what price he paid but generally the market is of the belief that he will generate the purchase price in EBITDA every year going forward obviously depending on the lithiumprice.
So there's many examples of this through history so he is the capital allocation muscle combined with the operational expertise to actually build mining projects is the secret source and the competitive advantage of thisbusiness.
And do those imprecco projects have similar life cycles to the mining because they are associated with those mines you can assume similar duration of the cashflows.
That's exactly right so if you imagine Chris has literally built a highway of 150 kilometers or 100 miles I guess from the mine to the port and then built a new port ready to export all this volume of iron ore and the infrastructure that has been built for this project is not only long life associated with this particular mine but could also be used by other third parties further increasing the volumes processed on the infrastructure of thetime.
On the sale of the stake massively de risking the project but as a shareholder you can kind of back out the multiple that was associated with that sale and is there some point where they no longer need to do those sales because the balance eaters show strong or do you just generally view that as a net positive from a de riskingstandpoint.
I think we're probably of the view that the businesses of sufficient size scale strength that maybe they don't need to do those sorts of de risking sales going forward but I would say it goes to the discipline of this management team that if they can take a project from a30% right to an80% right they're going to do it every single day and as I would say they will then reinvest those proceeds into other very high return on capital projects accelerating the flywheel and the end of themarket.
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And missing the importance of the broader vision and the broader competitiveadvantage, which is in In-resibility to operate minds cheaper than everybody else and build minds cheaper than everybodyelse.
And then allocate capitalaccordingly.
And so while my model is very complex and changes veryfrequently, I have learned not to get too wetted to the kind of share price number that model spits out at the end of all thatanalysis.
Maybe the third thing is that like insoftware, what I'll call a technical founder orCEO, can kind of rally the people and culture of a business better typically than a more corporateexecutive.
Chris has operated all of the machines onsite.
He can talk the language to his seven and a half thousandemployees.
And he understands the little changes he can make to make their lives better onsite, whether real money ismade.
And then in terms of maybe a couple of other minorones, butfewer, Isaid, would you like to invest in a constructionbusiness?
I think we would both turn up our nose and explain all the reasons why construction is really badbusiness.
But as acapability, having internal construction is part of the magic of thisbusiness.
And it took me a very long time to be convinced of thatfact.
And now I am like resoundingadvocate.
And the final thing is just that investors in this space are overly worried about picking commodity pricecycles, rather than thinking about through the cycle pricing and through the cycle return on investedcapital.
And so while many of us are focused on the predictability of earnings and only investing in software businesses that are really easy to model inExcel, this is a business that hasvery, very high through the cycle return on investedcapital.
And so from a quality perspective is actually far higher than people give it on firstglance.
This has been apleasure,Fraser.
And it's a pleasure to hear about the personal learnings that you've gotten out of this and the evolution or the maturity of the investingprocess.
I admire that just in terms of approaching businesses differently and seeming to appreciate longer durationdynamics.
I love hearing thoselessons, thebroader, the morepersonal.
It's allexcellent. Thank you very much for sharing theknowledge.
Now it's been a lot offun.
ThanksMatt. Appreciateit.
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